Home » Business » Biz Commentary
It's time to defend China's growth
By Shen Minggao |
June 6, 2012, Wednesday
|
Print Edition
Print Edition
DATA for April were weak across the board, prompting the reserve requirement ratio cut. Imports stagnated, confirming weak domestic demand. Industrial value added grew 9.3 percent year on year, the lowest since May 2009.
Property investment growth plummeted from 19.6 percent year on year in March to 9.2 percent in April, and data on new residential starts and land acquisition predicts further slowdown in the months ahead.
Retail sales growth slowed to 14.1 percent year on year. M2 growth fell from 13.4 percent year on year in March to 12.8 percent in April (relative to central bank forecast of 14 percent growth for 2012), and monthly yuan-denominated lending fell from 1,011 billion yuan (US$160 billion) to 682 billion yuan,
Fiscal revenue growth fell to 6.9 percent year on year (tax revenue 2.6 percent year on year), from 18.7 percent in March and 25 percent in 2011. In response, the People's Bank of China cut the reserve requirement ratio by 50 basis points effective on May 18, unlocking about 400 billion yuan of deposits.
Stabilizing growth
Stabilizing growth becomes a priority. One week after the RRR cut, Premier Wen Jiabao stressed that stabilizing growth should be on top of the policy agenda. He agreed that the economy is facing further downward pressure, and weak demand and profit margin squeezes are two present challenges. The government will aim to expand domestic demand and stabilize external demand.
In our view, this signals that policy is shifting to defend growth. To win the battle, policy fine-tuning would have to be upgraded to more aggressive easing.
New round of measures to promote consumption kicked off. The State Council decided in the middle of last month to allocate 36.3 billion yuan to subsidize energy-saving consumption. This is in line with our expectation that successor consumption supporting policies would be targeted, benefiting producers of energy saving and low emission products.
Resolute easing
Based on our estimation, the policy can potentially leverage sales of more than 300 billion yuan, although the net addition to sales would be less since a large part of the new consumption is simply substituting consumption of less energy efficient products. Active spending by the government, either directly or through subsidy, may boost GDP by more than the original expenditure.
We expect the downside risks to trigger further policy easing. The political economics in a year of leadership transition suggest that the authorities would not like to see continued economic slowdown into the third quarter right before the 18th national congress of the Communist Party of China.
We see the latest RRR cut as the beginning of more resolute policy easing. Further policy easing may include: (1) two additional RRR cuts this year to bring M2 growth to 14 percent, and loosening of loan-to-deposit ratio requirement to address the supply side of weak credit growth; (2) fiscal deficit close to the budgeted level (effectively 2.4 percent of GDP); pilot tax reform in the services sector is likely to be expanded from Shanghai to Beijing and then to more provinces in the near term; (3) extension of property policy easing from first home purchase to second home purchase, accompanied by adequate funding of social housing programs; and (4) launch of new infrastructure projects under the 12th Five-Year Plan.
The government will also encourage private investors to invest in the railway, subway, financial, energy, telecom, education and medical sectors, but progress may not be fast enough to significantly spur short-term growth.
Weaker rebound
The government is still aiming for above 8 percent growth this year - There are signs that the government can now tolerate slower growth amid declining potential growth and economic rebalancing agenda. However, we have learned that the government has a working growth target (above 8 percent) apart from the official growth target (7.5 percent), and the fiscal and monetary policy mix set at the beginning of the year is supportive of 8-9 percent growth. There is no convincing evidence indicating a change of the working target.
Annual growth may fall to 8.1 percent while the rebound in the second half is likely to be weaker. Based on the recent data and assumption on continued policy easing, we have adjusted our 2012 growth forecast from 8.4 percent to 8.1 percent. In particular, total fixed-asset investment growth is revised down from 18-19 percent to 16-17 percent.
The slowing investment is expected to have a spillover effect on consumption. We keep the contribution of net export to growth at a minus 0.7 percentage point, assuming weakening exports (especially due to possible escalation of the European sovereign crisis) are to be offset by slowing domestic demand and imports. We also downgraded the second-quarter growth from 7.9 percent to 7.5 percent year on year.
The buffer zone is shrinking in case of policy missteps. Above 8 percent growth is still achievable with sustained policy easing.
However, as our expected growth is approaching 8 percent, the risk of below 8 percent growth becomes clear and present if policy easing continues to lag behind.
Property investment growth plummeted from 19.6 percent year on year in March to 9.2 percent in April, and data on new residential starts and land acquisition predicts further slowdown in the months ahead.
Retail sales growth slowed to 14.1 percent year on year. M2 growth fell from 13.4 percent year on year in March to 12.8 percent in April (relative to central bank forecast of 14 percent growth for 2012), and monthly yuan-denominated lending fell from 1,011 billion yuan (US$160 billion) to 682 billion yuan,
Fiscal revenue growth fell to 6.9 percent year on year (tax revenue 2.6 percent year on year), from 18.7 percent in March and 25 percent in 2011. In response, the People's Bank of China cut the reserve requirement ratio by 50 basis points effective on May 18, unlocking about 400 billion yuan of deposits.
Stabilizing growth
Stabilizing growth becomes a priority. One week after the RRR cut, Premier Wen Jiabao stressed that stabilizing growth should be on top of the policy agenda. He agreed that the economy is facing further downward pressure, and weak demand and profit margin squeezes are two present challenges. The government will aim to expand domestic demand and stabilize external demand.
In our view, this signals that policy is shifting to defend growth. To win the battle, policy fine-tuning would have to be upgraded to more aggressive easing.
New round of measures to promote consumption kicked off. The State Council decided in the middle of last month to allocate 36.3 billion yuan to subsidize energy-saving consumption. This is in line with our expectation that successor consumption supporting policies would be targeted, benefiting producers of energy saving and low emission products.
Resolute easing
Based on our estimation, the policy can potentially leverage sales of more than 300 billion yuan, although the net addition to sales would be less since a large part of the new consumption is simply substituting consumption of less energy efficient products. Active spending by the government, either directly or through subsidy, may boost GDP by more than the original expenditure.
We expect the downside risks to trigger further policy easing. The political economics in a year of leadership transition suggest that the authorities would not like to see continued economic slowdown into the third quarter right before the 18th national congress of the Communist Party of China.
We see the latest RRR cut as the beginning of more resolute policy easing. Further policy easing may include: (1) two additional RRR cuts this year to bring M2 growth to 14 percent, and loosening of loan-to-deposit ratio requirement to address the supply side of weak credit growth; (2) fiscal deficit close to the budgeted level (effectively 2.4 percent of GDP); pilot tax reform in the services sector is likely to be expanded from Shanghai to Beijing and then to more provinces in the near term; (3) extension of property policy easing from first home purchase to second home purchase, accompanied by adequate funding of social housing programs; and (4) launch of new infrastructure projects under the 12th Five-Year Plan.
The government will also encourage private investors to invest in the railway, subway, financial, energy, telecom, education and medical sectors, but progress may not be fast enough to significantly spur short-term growth.
Weaker rebound
The government is still aiming for above 8 percent growth this year - There are signs that the government can now tolerate slower growth amid declining potential growth and economic rebalancing agenda. However, we have learned that the government has a working growth target (above 8 percent) apart from the official growth target (7.5 percent), and the fiscal and monetary policy mix set at the beginning of the year is supportive of 8-9 percent growth. There is no convincing evidence indicating a change of the working target.
Annual growth may fall to 8.1 percent while the rebound in the second half is likely to be weaker. Based on the recent data and assumption on continued policy easing, we have adjusted our 2012 growth forecast from 8.4 percent to 8.1 percent. In particular, total fixed-asset investment growth is revised down from 18-19 percent to 16-17 percent.
The slowing investment is expected to have a spillover effect on consumption. We keep the contribution of net export to growth at a minus 0.7 percentage point, assuming weakening exports (especially due to possible escalation of the European sovereign crisis) are to be offset by slowing domestic demand and imports. We also downgraded the second-quarter growth from 7.9 percent to 7.5 percent year on year.
The buffer zone is shrinking in case of policy missteps. Above 8 percent growth is still achievable with sustained policy easing.
However, as our expected growth is approaching 8 percent, the risk of below 8 percent growth becomes clear and present if policy easing continues to lag behind.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
